December 2016

California Supreme Court
California Supreme Court

The United States Supreme Court’s decision in Daimler A.G. v. Bauman, 571 U.S. __, 134 S.Ct. 746 (2014), has played a significant role this year in cases pending in Delaware and Rhode Island. Most recently, the California Supreme Court has weighed in, changing what we thought we knew about personal jurisdiction, at least in California.

In Daimler, the U.S. Supreme Court held that a court can exercise general jurisdiction (whereby a state court asserts jurisdiction over a defendant on claims unrelated to the defendant’s activities in the forum state) only when the defendant can be said to be “at home” in the forum – the paradigm being the state in which it is incorporated or has its principal place of business. The California Supreme Court has now found a way to turn that decision on its head. It held in Bristol-Meyers Squibb Co. v. Superior Court, 377 P.3d 874 (Cal. 2016) that plaintiffs from outside California whose claims do not arise out of anything involving California can sue a non-California defendant in a California court.

Bristol-Myers argued, pursuant to Daimler, that it was not subject to personal jurisdiction in the California courts for the suits of 592 non-California plaintiffs. First of all, it argued that it was not subject to specific personal jurisdiction because none of the 592 lawsuits by non-California plaintiffs arose out of anything plaintiff or defendant did in California. Moreover, it argued that it was not subject to general personal jurisdiction because it was not “at home” in California, based on the fact that it was neither headquartered nor incorporated in California.

The California Supreme Court agreed that there was no basis for the exercise of general jurisdiction, but instead found that a “new wave” specific jurisdiction existed because Bristol-Myers engaged in “nationwide marketing, promotion and distribution [that] created a substantial nexus between the non-resident plaintiffs’ claims and the company’s contacts in California . . . .” And, according to the Bristol-Meyers court, the more wide-ranging the defendant’s forum contacts, the more readily a “connection” between the defendant’s forum contacts and the claims by the non-resident plaintiffs can be found.

This decision of the California Supreme Court appears to basically moot the Daimler decision and may make any company that does business nationally subject to personal jurisdiction in California. Bristol-Meyers has filed a writ of certiorari with the U.S. Supreme Court, so this decision may have a short shelf life. For the time being, however, companies should be prepared to litigate in California, as the Bristol-Meyers decision is likely to factor into plaintiffs’ decision when choosing a forum in which to litigate.

Delaware Supreme Court
Delaware Supreme Court

The Delaware Supreme Court reversed the dismissal of a derivative suit for failure to make demand, finding that the complaint alleged particularized facts sufficient to create a reasonable doubt as to the disinterestedness and independence of a majority of directors, in Sandys v. Pincus, No. 157, 2016 (Del. Dec. 5, 2016).  In Sandys, the plaintiff alleged that some top managers and directors at Zynga, Inc. were given an exemption to Zynga’s rule preventing sales by insiders until three days after an earnings announcement.

Because Zynga’s board of directors had nine members, the Court examined whether the complaint had excused a demand as to at least five directors.  Two of the directors (Reid Hoffman, and the controlling stockholder and former CEO, Mark Pincus) had participated in the trades and were considered interested in the transaction.  Another director, Don Mattrick, had been named as the new CEO, and was therefore deemed interested because the corporation’s controlling stockholder was interested in the transaction.  The Court concluded that the complaint alleged reasonable doubt as to the disinterestedness of another three directors (adding up to six of the nine directors).

One director, Ellen Siminoff, was deemed to be potentially interested because she and her husband were co-owners of a private plane with Pincus, which “signaled an extremely close, personal bond” between the two directors and their families because unlike some other assets, a private plane “requires close cooperation in use, which is suggestive of detailed planning indicative of a continuing, close personal friendship.”  The Court noted that at the pleading stage, a plaintiff need not “plead a detailed calendar of social interaction to prove that directors have a very substantial personal relationship rendering them unable to act independently of each other.”

Another two directors, William Gordon and John Doerr, were partners at a prominent venture capital firm, Kleiner Perkins Caufield & Byers, which had interlocking relationships with both directors who traded in Zynga stock.  Specifically, Kleiner Perkins also was invested in a company that Pincus’ wife co-founded, and with a company on whose board Hoffman served as a director.  According to its public disclosures, the Zynga board had determined that Gordon and Doerr did not qualify as independent directors under the NASDAQ listing rules.  The plaintiff’s books and records inspection demand did not inquire as to the board’s NASDAQ determination, and the Court of Chancery found that these directors’ independence had not been sufficiently challenged.  The Delaware Supreme Court disagreed, stating that “to have a derivative suit dismissed on demand excusal grounds because of the presumptive independence of directors whose own colleagues will not accord them the appellation of independence creates cognitive dissonance that our jurisprudence should not ignore.”  While agreeing that “the Delaware independence standard is context specific and does not perfectly marry with the standards of the stock exchange in all cases,” the Court nonetheless identified criteria of the NASDAQ rule that “are relevant under Delaware law and likely influenced by our law.”

The plaintiff had followed the Court’s admonition in other cases to use one of the “tools at hand” – a statutory books and records inspection – to gather facts before filing his complaint.  However, the Court chided him for seeking only books and records relating to the underlying transaction and not those “bearing on the independence of the board,” particularly those relating to the board’s determination of independence under NASDAQ rules.  The Court also advised that “one of the most obvious tools at hand is the rich body of information that now can be obtained by conducting an internet search,” suggesting that the plaintiff had failed to do so and overlooked facts concerning Siminoff available through such an inquiry.  However, the opinion is silent as to whether the Court conducted its own internet search and relied on facts it discovered in its analysis.

Interestingly, both the Court of Chancery and the Supreme Court applied the single-prong standard of Rales v. Blasband (which examines only the disinterestedness and independence of directors, and typically applies when a plaintiff challenges a board’s failure to take action), rather than the two-prong standard of Aronson v. Lewis, which also examines the substance of a decision made by a board.  Neither party contested the applicability of Rales, and therefore the Supreme Court used it in its analysis.

In a dissent, Justice Valihura stated that she would have affirmed dismissal because the plaintiff failed to allege facts showing the materiality of investments made by Kleiner Perkins in other companies and also failed to plead why Gordon and Doerr lacked independence under NASDAQ rules (which are not necessarily coextensive with the Delaware standard for independence).  She also noted that the plaintiff had chosen to plead allegations about Siminoff’s co-ownership of a plane as supporting a business venture and not a close personal relationship, and that those allegations failed to establish the materiality of the venture.

 

 

beefCareful consideration of the language used in an insurance policy, or any contract for that matter, is extremely important.  A food services company, Meyer Natural Foods LLC (“Meyer”), found that out the hard way in a recent case filed in the U.S.D.C for the District of Nebraska.[1]  Exclusionary language in an insurance policy precluded Meyer from recovering its $1.4 million of damages related to the loss of a beef order due to contamination from a pathogen.  Meyer had contracted with a beef supplier, Greater Omaha Packing (“Greater Omaha”) to purchase certain beef products.  As part of their contract, Meyer required Greater Omaha to obtain an insurance policy to protect the value of the beef that was to be shipped, which they did through the Defendant in this case, Liberty Mutual.  One of the beef shipments Greater Omaha made to Meyer, unfortunately, contained E. coli, which resulted in the destruction of the entire shipment valued at $1.4 million dollars.

In an effort to recover that loss, Meyer turned to the Liberty Mutual insurance policy, which was purchased by Greater Omaha pursuant to their agreement.  However, there were certain exclusions in the policy, which may not have been considered by Meyer and/or Greater Omaha, and this language is the reason that U.S. District Judge John M. Gerrard dismissed Meyer’s suit against Liberty Mutual.  The language in question? An exclusion of coverage for “loss attributable to . . . contamination”.  Meyer’s main argument was that the policy exclusion did not specifically refer to E. coli, and that the word contamination is ambiguous, such that E. coli cannot be included therein.  But that argument was unsuccessful, as the court simply relied primarily on the plain meaning of the word contaminate, “to render unfit for use by the introduction of unwholesome or undesirable elements.”  In doing so, the court determined that E. coli clearly fits within this definition.[2]

The first lesson to take away from this case?  Always read and understand the insurance policy that will be covering a potential loss of your property.  No matter where you are on the food chain, you must be aware of all provisions of the insurance covering your property.  In this instance, Meyer did not obtain the insurance policy directly, but rather Greater Omaha did as part of their contract.  This case is a cautionary tale for obtaining insurance coverage of your property through a third-party.  In cases where a third-party obtains coverage, you still must read the policy, and understand the implications of its various exclusions.

Taking a step back to think about this particular scenario, one must ask, for what purposes would a company in the food distribution and supply industry seek insurance on their food products from a potential loss?  Risk of contamination or adulteration of the beef due to a pathogen such as E. coli would clearly be high on that list and, therefore, it should have been tantamount for Meyers to have sufficient language in the policy to protect against such an incident and ensure coverage.  Is it possible that Meyer never saw the insurance policy? Sure.  But that is the point.  A company, or their counsel, should always read every insurance policy with a fine-toothed comb to ensure that their property will be protected in the event of loss, even if they did not directly obtain that policy.

This is not to suggest that Liberty Mutual was hiding the ball when including exclusions in their policy. Rather, it appears Liberty Mutual was simply protecting its own interests.  Liberty Mutual likely inserted this contamination exclusion with this very type of loss in mind.  In many cases, as in this one, insurance companies are providing coverage to sophisticated companies that have the ability to negotiate the policies terms.  Including multiple exclusions as a starting off point for a well negotiated insurance policy is simply good business for an insurance company.  In fact, this case is not alone, as there have been a number of recent cases in which similar exclusions have been applied by the courts to preclude policy coverage.[3]

There was one final gaffe: One of Meyer’s main arguments in the suit was that the word “contamination” was ambiguous and therefore did not include beef tainted with E. coli.  However, in their own Complaint in this very case, they referred to their property loss as the result of contamination.  In fact, they referred to the “contamination” of beef by a pathogen eleven times.  To even the non-legal trained eye this position is contradictory.  One would be hard pressed to persuade a judge or jury that the very word used by that party to describe their property loss, is actually ambiguous when written in the insurance policy intended to cover that very property loss.   A reading of Judge Gerrard’s decision shows that this word choice in the Complaint certainly impacted the Court’s decision.

Again, the final take-away of this case study: lawyers need to choose each and every one of their words very carefully in all pleadings submitted to court.

 

Meyer Natural Foods LLC, et al. v. Liberty Mutual Fire Insurance Co., C.A. No. 8:15-cv-03116

 

[1] Meyer Natural Foods LLC, et al. v. Liberty Mutual Fire Insurance Co., C.A. No. 8:15-cv-03116

[2] The plain meaning was not the only basis for Judge Gerrard’s conclusion, as will be explained further below.

[3] Perhaps the most extreme example is when the Eleventh Circuit Court of Appeals affirmed a decision by the USDC for Northern Alabama in 2011.  The Appellate Court determined that a curry aroma from a neighboring Indian restaurant was considered a “pollutant” under the insurance policy, such that the property damage (fur coats) caused by the aroma was not protected by the policies coverage.

Maxine Furs, Inc. v. Auto-Owners Ins. Co., 426 F. App’x 687, 687 (11th Cir. 2011).

Gavel_editFor the first time since 1997, the United States Supreme Court explored the requirements for proving a federal securities fraud claim based on insider trading, in Salman v. United States (Dec. 6, 2016).  The Salman opinion confirms that a factfinder may infer a personal benefit to a tipper from a gift of confidential information to a trading relative or friend, without the added requirement of “proof of a meaningful relationship” that had been imposed by the Second Circuit in United States v. Newman, 773 F.3d 438 (2d Cir. 2015).  Salman thus resolves a circuit split that had developed between the Second and Ninth Circuits.

Historically, individuals have been found to have engaged in securities fraud under “classical” theory or “misappropriation” theory.  Under classical theory, corporate “insiders” (directors, officers, and others deemed to hold a temporary fiduciary status) either trade on inside information or tip the information to someone who does.  Dirks v. S.E.C., 463 U.S. 646 (1983).  Under misappropriation theory, the person trading or tipping inside information need not owe fiduciary duties generally to a corporation and its stockholders, but must violate some relationship of trust and confidence through which she received the information.  United States v. O’Hagan, 521 U.S. 642, 650-52 (1997).  In both cases, then, the person engaging in insider trading has committed an act of deception by violating a relationship of trust and confidence.  Also, in both cases, the actionable deception is to the source of information and not to the other party to the trade or the general trading public, even though the latter may be injured by the trader’s conduct.  See id.  The Supreme Court has not read the federal securities laws as establishing “a general duty between all participants in market transactions to forgo actions based on material, nonpublic information.”  Chiarella v. United States, 445 U.S. 222, 233 (1980).

In the 2015 Newman case, the Second Circuit further limited the ability of the government to bring insider trading cases.  The court acknowledged that language in the Supreme Court’s Dirks opinion could be read as permitting a factfinder to infer that a tipper received a personal benefit by providing confidential information to a trading relative or friend, but added that such an inference “is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”  Newman, 773 F.3d at 452.  The Newman opinion called into question hard-won victories by the federal government against insider trading defendants in the Southern District of New York.

The Ninth Circuit took a different direction in Salman.  In that case, confidential information originally was obtained by an investment banker at Citigroup, Maher Kara, who shared it with his brother Michael.  Unbeknownst to Maher, Michael then shared the information with others including the defendant, Bassam Salman, whose sister was married to Maher.  On appeal, the Ninth Circuit refused to follow Newman, considering itself bound by Dirks’ statement that a tipper benefits personally by making a “gift” of confidential information to a trading relative or friend.  To the extent Newman required that the tipper receive an additional benefit by providing the information, the Ninth Circuit declined to follow it.  United States v. Salman, 792 F.3d 1087, 1093 (9th Cir. 2015).

In a unanimous opinion by Justice Alito, the Supreme Court agreed with the Ninth Circuit, explaining that its discussion of gift giving in Dirks resolved the case.  As conceded by Salman’s counsel at oral argument, Maher indisputably would have breached his duty by trading on inside information himself and then making a cash gift of all trading proceeds to his brother.  Maher “effectively achieved the same result by disclosing the information to Michael, and allowing him to trade on it.”  Viewed in this light, it was unnecessary to find an additional pecuniary benefit resulting from the exchange of information:

Dirks specifies that when  a tipper gives inside information to ‘a trading relative or friend,’ the jury can infer that the tipper meant to provide the equivalent of a cash gift.  In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.  Here, by disclosing confidential information as a gift to his brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to Citigroup and his clients – a duty Salman acquired, and breached himself, by trading on the information with full knowledge that it had been improperly disclosed.

Thus, Salman also appears to confirm that for an insider trading charge to succeed, the recipient of confidential information must know that it was disclosed in violation of a relationship of trust and confidence.

Salman was in many respects an “easy case,” because of the obvious and undisputed family relationships among the actors involved.  It remains to be seen whether the Second Circuit will continue to apply Newman or some new standard to cases in which the tipper and tippee are not in the same family and the benefit of making a gift of information is arguably less obvious.  In this regard, the Supreme Court stated in footnote 1 of its opinion that its decision did not implicate the questions of proof arising in the Newman case.  Practitioners also may observe that in footnote 2, the Supreme Court noted that the parties did not dispute the assumption that Dirks’ personal-benefit analysis applies both in “classical” and “misappropriation” cases, and therefore did not resolve whether both theories applied (as the government claimed) or only the misappropriation theory applied (as Salman claimed).

Salman v. United States (Dec. 6, 2016)

United States v. Newman, 773 F.3d 438 (2d Cir. 2015)

 

Pennsylvania-supreme-court-buildingOn November 22, 2016, the Pennsylvania Supreme Court issued a 4-2 Opinion in Rost v. Ford Motor Co., No. 56 EAP 2014, 2016 Pa. LEXIS 2638 (Pa. Nov. 22, 2016), in which the court purported to uphold and expand upon prior asbestos causation decisions set forth in Gregg v. V-J Auto Parts, Co., 596 A.2d 274 (Pa. 2007), and Betz v. Pneumo Abex, LLC, 44 A.3d 27 (Pa. 2010). However, when juxtaposed against the dissents of Chief Justice Saylor—the author of both Gregg and Betz—and Justice Baer, it becomes evident that the majority opinion creates an additional obstacle for defendants (particularly low-dose defendants) on the path toward exculpation.

In the opinion, the majority upholds a plaintiff’s verdict against Ford Motor Company for a plaintiff, Mr. Rost, who alleged he had experienced direct occupational bystander exposure to asbestos from Ford products while working as a “gofer” in an automotive repair garage over a three month time period. Ford challenged the verdict on two grounds: i) the plaintiff’s expert, Dr. Frank’s, causation opinion was impermissibly before the jury when the opinion amounted to an “each and every breath” opinion (which the court explicitly rejected in both Gregg and Betz) and, with respect to substantial factor causation, Dr. Frank’s opinion failed to take into account plaintiff’s other industrial occupational exposure during which Mr. Rost was exposed to asbestos “at pretty high levels” over at least a ten year period; and ii) the trial court erred in consolidating Mr. Rost’s case with other non-related mesothelioma cases.

Dr. Frank testified generally that mesothelioma is a dose-response disease wherein as the dose increases, the likelihood of developing the disease increases. He also testified that it is scientifically impossible to identify a particular exposure that caused the plaintiff’s disease where there were four sources of exposure, but that the causative agent was a series of exposures. Mr. Frank asserted that all documented exposures should be considered as contributing to the plaintiff’s development of disease, and concluded that it is not possible to quantify how much asbestos initiates the disease process and that it also varies according to individual susceptibility. After testifying to those opinions generally, Dr. Frank testified using a hypothetical that exposure to Ford products specifically was a substantial contributing factor to the plaintiff developing mesothelioma. Dr. Frank asserted “if [the three month exposure to Ford products] would have been [Mr. Rost’s] only exposure, I would be sitting here saying that that was the cause of his disease. Given that he had other exposures, it was all contributory.” Rost, No. 56 EAP 2014, 2016 Pa. LEXIS 2638, at *13.

 

Plaintiff’s Expert’s Conclusory Opinion Satisfied the Causation Standard

The majority began its analysis by revisiting two prior decisions—Gregg and Betz. In Gregg, the court rejected the “each and every breath” theory of causation as insufficient to create a factual issue to submit to the jury. In Betz, the court determined that a plaintiff must adduce evidence that exposure to a particular defendant’s asbestos-containing product was sufficiently “frequent, regular, and proximate” to support a jury’s finding that a defendant’s product was substantially causative of the disease.

In differentiating this case from Gregg and Betz, the court found that “while Dr. Frank clearly testified that every exposure to asbestos cumulatively contributed to Rost’s development of mesothelioma, he never testified that every exposure to asbestos was a ‘substantial factor’ in contracting the disease.” Id. at *27. (emphasis added). The court decided that Dr. Frank did not testify that a single breath of asbestos while at the garage caused Mr. Rost’s mesothelioma but that the entirety of his three month exposure caused his disease based on the fact that mesothelioma may develop after only small levels of exposure. The court explained that “[u]nlike the expert witness in Betz, who unabashedly offered ‘each and every breath’ testimony, in this case Dr. Frank relied upon a generally accepted methodology, taking into consideration exposure history, individual susceptibility, biological plausibility, and relevant scientific evidence (including epidemiological studies).”  Id. at *29-30.

The majority also explicitly rejected Ford’s argument that Gregg and Betz require asbestos plaintiffs to prove relative exposure as part of the “substantial factor” test, stating that “[c]omparison of Rost’s other occupational exposures to asbestos was unnecessary.”  Id. at 36. However, this finding contradicts what the court previously set forth in both Gregg and Betz, where the court indicated that a comparative analysis was warranted. In Gregg, the Court noted that “…we do not believe that it is a viable solution to indulge in a fiction that each and every exposure to asbestos, no matter how minimal in relation to other exposures, implicates a fact issue concerning substantial-factor causation in every ‘direct-evidence’ case.” Gregg 943 A.2d 216, 226-27 (Pa. 2007)(emphasis added). In Betz, the court also noted that “a comparative assessment of impact among differing exposures…is required for causal attribution as a matter of science, as it is under Pennsylvania law.” Betz 44 A.3d 27, 58 (Pa. 2012).

Chief Justice Saylor, joined by Justice Baer, best sums up the difficulties for defendants inherent in the majority’s opinion when he critiques that

[The plaintiff’s expert], however, did not provide the jury with any standards, or benchmarks, or other scientifically-accepted premises for assessing the substantiality of the risk associated with Mr. Rost’s “relatively low dose” exposure to [Ford’s] products in the context of Mr. Rost’s overall exposure. Rather, in response to a hypothetical question generally presenting the circumstances of Mr. Rost’s exposure to Ford products, [the plaintiff’s expert] merely affirmed, in a conclusory fashion, his belief that the exposure was substantially causative…By way of explanation or otherwise, the expert then reverted to various reaffirmations of his other opinions on general and specific causation, i.e., that “all [exposures] contributed[.]”…Where the issue is simply risk—I fail to appreciate how the substantiality of relatively low-dose exposures can be fairly demonstrated in the absence of some sort of reasonably-developed comparative risk assessment accounting for higher-dose industrial exposures. Rost, No. 56 EAP 2014, 2016 Pa. LEXIS 2638, at *69-70, 74.

 

Ford Suffered No Prejudice as a Result of Improper Consolidation

On the issue of consolidation, the majority found that the trial court’s apparently mandatory practice of consolidating asbestos cases based solely on the type of disease alleged violated Pennsylvania Rule of Civil Procedure 213(a). Under that rule, the trial court is permitted to consolidate cases, at its discretion, when there are common issues of law or fact, or which arise from the same occurrence or transaction. Instead, the trial court conducted no analysis and denied Ford’s several requests to sever the case on the sole rationale that consolidation has been a long-standing practice in asbestos matters before the trial court.

Despite the violation, the Pennsylvania Supreme Court found that Ford suffered no prejudice from the trial court’s error because Ford had an opportunity to cross-examine the other defendants’ witnesses but chose not to; Ford did not object to any portion of other defendants’ expert testimonies or closing arguments; and the jury was not confused on the issues when the trial court repeatedly instructed the jury to treat each case individually and decide each on its own merits.

Chief Justice Saylor also dissented from the court’s finding that the trial court’s error in consolidating several matters was not prejudicial and asserted that it is difficult to articulate specific prejudice but, when the court subsumes all of the differences among the various plaintiffs and their circumstances in unrelated cases, prejudice is inherent.

 

Key Takeaways for Asbestos Defendants

Asbestos defendants, particularly low-dose asbestos defendants, are in a precarious situation in Pennsylvania. The Pennsylvania Supreme Court appears to have approved conclusory opinions as satisfaction of a plaintiff’s burden to establish substantial factor causation and, perhaps even more disturbing for defendants, the Court has also apparently sanctioned the trial court’s improper consolidation of unrelated same-disease asbestos cases without consequence. So what is a defendant to do (besides hope that they don’t get sued in Pennsylvania and/or vote out the majority Justices)?[1]  Unfortunately, the answer is not clear given the conflicting views between Rost with Gregg and Betz, but it is clear that it will be more unpredictable for defendants to litigate asbestos cases in Pennsylvania as the current court takes a more plaintiff-friendly stance.

[1] The author of this article is both a proud resident and licensed attorney of the Commonwealth of Pennsylvania and, therefore, believes she has license to speak tongue in cheek about her state and the process by which judicial positions are filled.